Producer price index declines in October

Journal Record, The (Oklahoma City), Nov 11, 1999

WASHINGTON (AP) -- Prices at the wholesale level fell 0.1 percent in October as the costs of gasoline, heating oil and food all dropped, more than offseting price increases for cars and prescription drugs. Despite the good inflation news, economists said the Federal Reserve may still order another rate increase when it meets next week.

It was the best showing in the producer price index -- which measures inflation pressures before they reach the consumer -- since a 0.5 percent decline in wholesale prices in February, the Labor Department said Wednesday.

In September, wholesale prices surged by 1.1 percent, the biggest pickup in wholesale inflation in nine years.

But, not counting the volatile energy and food categories, the "core" rate of inflation at the wholesale level rose a stronger-than- expected 0.3 percent in October, following a worrisome 0.8 percent rise in the previous month.

Economists offered conflicting opinions about whether they believe the Fed will raise interest rates for a third time this year on Nov. 16, but none were willing to rule out another bump up in rates.

Some pointed to last month's 0.1 decline in wholesale inflation as a sign of well-behaved inflation that justifies the Fed staying on hold.

"I think they are probably not going to do anything, but it's a close call," said Donald Ratajczak, director of Georgia State University's economic forecasting project.

Others analysts cited the 0.3 percent rise in the core inflation rate and the fact that wholesale prices have risen at an annual rate of 2.9 percent so far this year, compared with no change in 1998, as reasons why the Fed would raise rates to pre-empt inflation in the near future.

"This report is an `eye of the beholder' type with mixed messages," said First Union chief economist David Orr. "In our view, however, it falls modestly on the tighten side of the Fed ledger for Nov. 16."

Some economists said the 0.3 percent increase in the core rate is not as troubling as it seems. A 1.1 percent rise in car prices in October largely contributed to the increase in the core rate, economists said. Excluding cars, the core rate rose only 0.1 percent, in line with analysts' expectations.

The increase in car prices is expected to be temporary and happened as more dealers started selling new 2000 model cars with slightly higher sticker prices in October, said Paul Taylor, chief economist for the National Automobile Dealers Association.

Meanwhile, he said, there were fewer cheaper-priced 1999 models to buy.

Another contributor to the rise in the core rate was a 1.2 percent jump in prescription drug prices, which Ratajczak attributed to drug companies raising prices to cover litigation risks.

The 0.1 percent decline in overall wholesale prices reflected a 1 percent drop in energy costs. Heating oil prices fell 5.5 percent and gasoline prices declined by 3.8 percent. Lower gas prices reflect a modest decline in crude oil prices and less demand by motorists after the peak summer driving season, Ratajczak said.

However, economists believe energy prices will be on the rise in November's report.

Food prices, meanwhile, declined by 0.7 percent in October. A 16.3 percent drop in egg prices, the biggest decline since September 1993, and a 5.9 percent decline in pork prices contributed to the decrease in all food prices.

Fresh vegetable prices decreased by 10.2 percent, but the price of fresh fruits rose by 1.7 percent.

In a separate report, the number of Americans filing for unemployment benefits last week fell by 6,000 to 285,000.Economists say any claims level below 300,000 is an indication of an extremely tight labor market.